Ignore the European lessons and you pay the price – yet again!

What an interesting year for anniversaries! Exactly thirty years ago Laker Airways went bust and Bill Mackey, Laker’s liquidator, left us his own history lesson, which is now part of accountancy folklore.

He produced a colourful checklist for prophesying a company’s financial collapse: lavish offices and flash company cars with personalised plates; a flagpole in the forecourt and fountain in the reception area; a Queen’s Award for Industry; recently changed bankers; audit partner who grew up with the company; a salesman as CEO; and Chairman known for his charitable works. It is a lasting memorial to failed enterprises dominated by wide boys with aspirations unmatched by their follow-through (a bit like my golf).

Bill Mackey’s checklist is equally prescient beyond the corporate level. For example, that edifice of money-printing profligacy, the European Central Bank (ECB), has just laid down a marker for institutional permanence by celebrating the opening of glitzy new Frankfurt headquarters that will set back EU taxpayers a mere 1.2 billion euros, flagpoles and fountains included.

This could prove to be the ultimate bailout.

This is the bank, remember, that has agreed to underwrite, without limit, in flagrant breach of its own constitution, Spanish and Italian bonds, and whose own solvency rests on the promise by eurozone countries collectively to provide trillions of euros to meet the entirety of eurozone debt. Who knows? This could prove to be the ultimate bailout.

Disastrous dress rehearsal

Which reminds me of another anniversary: exactly twenty years ago, in September 1992, Britain faced financial armageddon when speculators demolished the Bank of England’s efforts to keep the pound inside the Exchange Rate Mechanism (ERM).

What is astonishing is that the main lesson of the Bank’s defeat – that national institutions cannot intervene unilaterally to beat the market – has not been picked up by today’s European leaders. The ERM debacle of two decades ago provided a full dress rehearsal of the futility of pursuing political aspirations which depend on manipulated workings inside a fixed-rate currency system.

The British Government had joined the ERM cherishing the belief that we could enjoy a German-style economy, characterised by low inflation and monetary stability, by simply tying the pound to the deutschmark. The fallacy surfaced with a vengeance when, two years later, the UK’s persistently weak economic performance caused market speculators to value the pound below the permitted convertibility rate against the DM. But Chancellor Norman Lamont (backed by Prime Minister John Major) would have none of that. Lamont embarked on a mission to boost the pound by hiking interest rates to 10%, then 12%, even a frantically futile 15%, coupled with mega-buying of pounds on the markets.

Speculators, led by George Soros, continued their ‘shorting’ spree with massive selling of pounds they did not even own. But instead of accepting a devalued rate band inside the ERM, Lamont and Major sensibly chose to take the pound out altogether. Despite dire warnings of imminent economic doom, inflation remained benign and the pound, without any contrived help, rose.

It was a nasty foretaste of the ill-conceived “one-size-fits-all” paradigm of the euro-project, and shows what happens whenever leaders persist in the belief that brazen political ambitions can, somehow, overcome economic law. Its lessons have already been replayed with unfailing accuracy in Greece, Spain and Italy. The rest will follow.